Tuesday, August 1, 2017

Banks May Be Hit With $50 Billion Capital Needs After Brexit

Oliver Wyman says lenders will need capital for European units; Need to exist outside U.K. will only grow, consultant says.

By Sarah JonesBloomberg

August 1, 2017

Banks may need to find $30 billion to $50 billion of additional capital to support new European units in the aftermath of a hard Brexit, according to Oliver Wyman Inc.

The extra money is equivalent to 15 percent to 30 percent of the capital that wholesale banks currently commit to the region, the management consultant said in a report published Tuesday. In addition, operating costs could rise by $1 billion as functions previously handled in London are duplicated on the continent, the company said.

A hard Brexit where banks lose privileged access to the European Union’s single market would “fragment the European wholesale-banking market,” Oliver Wyman partners including Matt Austen and Lindsey Naylor wrote in the report. “It will also make it significantly less profitable. Banks could see two percentage points knocked off their returns on equity.”

Alarmed by the lack of progress on EU exit talks, banks with operations in the U.K. are establishing entities on the continent, with Frankfurt emerging as an early favorite. Lost access to the union could drive as many as 35,000 financial-services jobs from Britain, including up to 17,000 from wholesale banking, Oliver Wyman estimates.

The pressure for banks to boost their operations on the continent will likely build as the European Central Bank’s desire for tougher banking supervision across the euro zone forces lenders to show they’re self-sufficient and have strong governance, according to the report.

“These new challenges from Brexit will raise difficult questions about the viability of some activities,” the partners wrote. “Some banks may even choose to withdraw capacity from the European market as a whole and re-deploy to other regions, such as Asia or the U.S.”